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Employee Plans Compliance Unit (EPCU) - Completed Projects - Project with Summary Reports - Simplified Employee Pension (SEP) Plan

Simplified Employee Pension (SEP) Plan Project Summary

The Employee Plans Compliance Unit (EPCU) simplified employee pension (SEP) plan project began in March 2009 and ended in August 2011. Compliance contact letters were sent to a sample of individuals who received a Form 5498 with SEP contributions reflected in Box 8. This letter requested the individual complete a short questionnaire regarding the SEP contribution and the SEP plan.

The contact letter contained introductory materials including identifying information regarding the Filer (Trustee or Issuer), along with a brief explanation of the reason for the compliance check. Some of the questions were:

  • Does Box 8 of Form 5498 reflect the correct dollar amount of the SEP plan contribution;
  • What was the dollar amount attributable to XXXX and XXXX [calendar years];
  • What is the name, address and employer identification number (EIN) of the plan sponsor;
  • Was any portion of the SEP plan contribution amount related to a rollover;
  • Is the taxpayer (TP) who received this letter the SEP plan sponsor or does this individual have a 5% or more interest in an entity that is the plan sponsor; and
  • Number of employees, participants, and reason for any employee not participating.

Results

The project goals were met, and focus points for EP were identified including recommendations to enhance compliance. Responses showed that:

  • Filers are not properly completing the Form 5498;
  • SEP plan sponsors are contributing amounts exceeding Code limitations;
  • All eligible employees are not being included as plan participants; and
  • Controlled group situations are not being addressed.

Most common preventable errors discovered from the Project included:

  • Filer errors on Form 5498 -  Rollover contributions erroneously reflected as SEP contributions in Box 8 when they should have been reflected as Rollover contributions in Box 2;
  • Transferred contributions used to purchase an annuity incorrectly reported by insurance companies as SEP contributions;
  • Excess SEP plan contributions; and
  • Plan sponsors erroneously excluding eligible employees; in some instances, due to the failure of the plan sponsor to comply with Code sections 414(b) and (c).

Those plan sponsors discovered to have operational defects (without examination of the plan books and records of the plan sponsor) during the compliance check process were encouraged to voluntarily correct using the Employee Plans Compliance Resolution Program (EPCRS). Since a compliance check is not an examination, most form and/or operational errors can be corrected using EPCRS.

In many cases, correction was secured in the form of additional contributions to other employees, removal of excess contributions and corrected Form 5498. TPs were also reminded to adjust their Form 1040 when appropriate. SEP plan sponsors were also advised to make appropriate correction for future years. Potentially noncompliant situations which required review of the plan sponsor’s books and records were referred for additional enforcement activity including examination.

Background

A SEP plan provides employers (plan sponsors) with a simplified method to make contributions toward their employees’ retirement and, if self-employed, their own retirement. When employees are not properly treated for SEP plan purposes, they may be incorrectly excluded from plan participation or receive contributions on their behalf for which they are not entitled. In addition, some SEP plan participants may receive allocations to their SEP-IRA that are too large, others too small or no allocation at all. As a result, discrimination in favor of highly compensated employees (HCEs) may occur and improper tax deductions may be taken.

There are some basic steps that must be taken in setting up a SEP plan. Eligible employees must be included for eligibility and participation purposes. Contributions may not exceed certain limitations, which are adjusted based on cost-of-living increases.

The Project was designed to obtain information about SEP plans to help EP in assessing the need to develop further tools and guidance. The Project goals were to determine whether:

  • Financial institutions/trustees (Filers) were properly completing Form 5498;
  • SEP plan contributions/deductions were within Internal Revenue Code (Code) sections 408(k) and 404(h)(1) limits; and
  • All eligible employees of the SEP plan sponsor were being properly treated for eligibility and participation purposes in the SEP plan.
Page Last Reviewed or Updated: 04-Apr-2014